The risk implications of the business loan activity in credit unions

Drivers of depositor discipline in credit unions

“…Finally, Gómez‐Biscarri et al. (2021) analyzed the effects of business lending on CU risk and found that CU deposits react negatively to risky business loans in an effect suggestive of discipline.…”

“…In order to give an initial description of CU depositor discipline, we use methodologies similar to those that have been applied to banks. Our first set of analyses consist of regressions of the main dependent variables of interest, growth in different measures of deposits, on a set of risk indicators and CU fundamentals, some of which have been previously used in the literature of market discipline of banks (Barajas & Steiner, 2000; Berger & Turk‐Ariss, 2015; Calomiris & Powell, 2001; Martinez Peria & Schmukler, 2001) and some which are specific to credit unions (Bauer et al., 2009; Frame et al., 2003; Gómez‐Biscarri et al., 2021). In particular, we use the following regressors: net worth over assets of the CU ( NWTA ), non‐performing loans ( NPL ), loans over assets ( loansta ), return on assets ( ROA ) and the standard deviation of past ROAs ( sdROA ), the natural logarithm of 1 plus the number of past quarters with losses ( PL ) and the interaction of PL with sdROA (see Gómez‐Biscarri et al., 2021).…”

“…The results on the two control variables suggest that higher saving rates lead to higher deposit growth—a result consistent with the banking literature—whereas size is negatively related to growth in shares and deposits. This latter result, which is in contrast with the findings for banks, can also be rationalized by the peculiarities of CUS: given the field of membership restrictions and some regulatory limits on CU activities, it is difficult for large CUs to grow in their traditional market, so further growth may be achieved by departing from the member‐centric activities of the CU (Gómez‐Biscarri et al., 2021). Finally, Panel B of Table 2 presents a subset of the estimated coefficients of the alternative specifications where ROA is replaced by NIM and NPL is replaced by Charge‐offs .…”

“…Our analysis proceeds in several steps. We first test for the existence of depositor discipline using methodologies common to the market discipline literature (see Barajas & Steiner, 2000; Calomiris & Powell, 2001; Gómez‐Biscarri et al., 2021; Maechler & McDill, 2006; Martinez Peria & Schmukler, 2001). In particular, we relate deposit and member growth to a set of CU fundamentals and risk indicators while controlling for idiosyncratic factors and, to the extent possible, for unobservables: we expect that CU members withdraw or diversify their shares and deposits or abandon the CU when fundamentals deteriorate or the CU increases its risk‐taking.…”

Deposit insurance and credit union lending

“…The extent to which credit union lending and portfolio risk respond to a change in deposit insurance is likely to depend crucially on the monitoring behaviour of credit union depositor-members, and whether these members are willing to exert discipline on managers following changes in the volume and composition of lending and the risk profile of credit unions (Gomez-Biscarri et al, 2021). On the one hand, the enhanced information environment at credit unions brought about by common bond arrangements and reduced asymmetric information may make it more likely that member-depositors become aware and take steps to discipline managers in the light of excessive lending and increasing loan portfolio risk.…”